Boma Adoki and Melanie Shone: Major change to the UK tax regime for contractors


HM Revenue and Customs (HMRC) is continuing its quest to ensure that individuals who work like employees pay tax like employees, even when working via a personal service company (PSC). However, it has had mixed success recently, as a number of its determinations have been overturned in the Tax Tribunal.

Set against the backdrop of substantial litigation over the last few years, which has focused on worker status for employment law purposes, such as classifying Uber drivers, HMRC will introduce new IR35 tax rules, coming into effect from April 2020, that look to encourage compliance with tax legislation.

The new IR35 rules will require private sector client organisations to decide whether there is a hypothetical employment relationship between the individual contractor and the client organisation.

If there is, the client organisation or other third-party fee payer will need to deduct and account for applicable income tax and employee national insurance contributions (NICs), as well as paying employer NICs. Under the current rules, this liability falls on the PSC.

The new rules will also introduce a new client-led status disagreement process across both public and private sectors, through which a contractor can challenge their status assessment. However, the existing rules will remain unchanged for small organisations.

Ahead of April 2020, organisations that engage contractors need to start identifying contractor or intermediary arrangements that may fall within scope of the new rules, consider potential options for existing and new contractor arrangements, establish a contractor communication strategy and status dispute resolution process, update consultancy agreements and relevant internal policies and practices, and do a thorough cost analysis for engaging contractors via PSCs beyond April 2020.

A substantial number of individuals in the gig economy, who were engaged directly and had been treated as self-employed, have been classed as workers for employment law purposes, and require all the rights that come with worker status, such as holiday pay and the right to bring discrimination claims.

These recent decisions and changes to the tax rules make it clear that employers engaging contractors should immediately review arrangements and act to get their house in order.

Boma Adoki (pictured) and Melanie Shone are associates at Stevens and Bolton